Knowing What to Charge For
Updated: Aug 16, 2020
You are getting from zero to one. You have invested blood, sweat and tears going from an idea to something product-like. It's minimal but not viable, just yet. Your customers are liking what they see and are asking you how much you charge for this half-machine, half-beast piece of art. How do you decide how and how much to charge?
Knowing What to Charge For:
Similar to the idea of a unit in unit economics that is relevant during scaling (or value capture), there is the idea of a unit of value during value creation. Simply put, your unit of value is the smallest meaningful unit of your experience. If you think of your offering as a new workflow, what is the experience container within which your customer engages with you repeatedly? Knowing this is the first step to thinking about price. While unit economics ensures you are capital-efficient, your unit of value ensures you are value-efficient. You become aware of which parts of your offering are creating value and how.
A unit of value is the smallest meaningful unit of your experience.
Let's take a few examples of identifying units of value. What is the smallest meaningful unit of experience for AirBnB? A stay. Anything smaller and it is not meaningful anymore. There is no concept of half a stay. What about Uber or Lyft? That would be a ride; to be dropped from point A to point B beyond a distance you would consider walkable. What about Facebook, Instagram or Twitter? It's a post. You cannot post half a post. What about a more technical product like Airtable? What is the smallest unit of experience for Airtable? It's not a base which is a notional container; it is a record.
Identify a container to which you can attach value parameters.
Pulling back to the value unit lets you identify a container to which you can attach value by adding parameters. It is like attaching a small writeup to a piece of art that includes the price. Observing a painting is pure experience and does not have any attributes, just feelings. Only when you read the narrative attached to it, does the art have value for you. In one sense, you have been told why this experience is valuable, so now you can value it. It's the same for your offering. You need to tell your customers what about this unit of experience is valuable and why by defining value parameters.
Continuing with the same mix of physical and digital experiences, AirBnB attaches destination, duration, and number of occupants as coarse value parameters to the unit of a stay. If you like what you see with these, you can adjust what you see with several fine value parameters. Uber or Lyft attaches destination, type of ride and number of passengers as value parameters. Finer value parameters like surge pricing are not visible to the passenger, while others like tips are. As a general rule, whoever pays gets more value parameters to decide how they will spend their money.
Facebook, Instagram, and Twitter offer very little control over the value they offer you. Quite the opposite, you offer them value by creating a post. You simply get a feedback mechanism: the Like, Love, Re-tweet or Follow buttons. They show you what they think you would want to see based on these feedback mechanisms. They also show you ads based on these feedback mechanisms. In that sense you are not their primary customer, the advertisers are. You are their consumers. Advertisers get significantly more value parameters based on which they target consumers, and spend their money.
Finally, Airtable attaches value parameters like the number of records, size of an attachment, and time ( how far back you can see historical records) to a record. The base itself is simply used as a container to hold these parameters but they do not charge for the base itself. Put another way, they want you to create as many bases as possible, so you leave your mark everywhere.
Micro-interactions as atoms of value
Knowing what you can charge for is good. But how do you get your customers to pay? Startups do not have a brand to buffer dissatisfied customers and get them back. Customers have to fall in love with their experience the first time they experience it, live with it, find it indispensable and eventually be willing to pull out their credit card and subscribe to your offering, all without you making a single sales pitch. Your experience is your sales pitch.
As with any retail business, negatives are deadly. Even the smallest negative experience builds resentment, making it less likely your customer will reach for his credit card later. Only with a fluid, flawless experience and a deep understanding of your customers' needs do you even stand a chance. This is hard and precise work for a startup. If you expect to make money in the end, you have to get the parts leading up to it exactly right. How do you get to this level of precision?
Micro-interactions create moments of value for your customers that accumulate over the experience
Dig deeper and identify the atomic units of value. These are your micro-interactions. Micro-interactions create moments of value for your customers. How elegantly your tagging works, how easy it is to shares URL to the view, how simple it is to schedule a ride for later are all the atoms of your workflow. Typically these last only a few seconds, but they leave a positive impression on your customer. As these moments accumulate, the overall feeling is one of flow and positivity. Your customer feels good using the product.
For example, in Airtable -- my favorite tool at this time -- the experience of creating a record in Airtable has several micro-interactions: the easy of creating a view, the ease of renaming a view, the ease and pleasure of seeing a field value in different colors, the ease of sharing my view with others ( and prevent copying of my data ). Now you understand why it's hard and precise work; every micro-interaction has to work exactly right for the customer to feel good. One poor micro-interaction can have an outsized effect on the entire experience.
Getting customers to pay :
Having experience value a customer is now open to considering paying for it. This is so because we are wired for reciprocity. That does not mean what we will though. We are also wired for self-preservation. Having gotten used to value for nothing, we want to continue this process as long as possible even if there is some guilt in doing so. After all, money is a precious resource and it makes sense to save it where possible. How do you get customers to pay? In a word: seduction.
Give utility for free, but create desire access excitement
You want them to fall in love with your product but also hold the best micro-interactions back. You get the vanilla flavor for free, but to get chocolate you need to pay. You want to create desire. This means layering your micro-interaction into two levels: utility and excitement. Give utility for free, but create desire to access excitement.
In Airtable's case adding color to my records and calendar requires me to upgrade. It is so much nicer to be able to see my records in color. As I rationalized why it's worth paying for one month, the desire to see my precious calendar in color anchored my thinking. Because I had full utility I was constantly reminded how nice it would be to see it in color, without feeling pressured to buy. You want your customer to convince themselves.
In a counter-productive move, the calendar always defaults to one hour unless I upgrade. This adds friction to the utility layer and generates resentment. I should not have to pay to see my calendar functioning.
A word on category-defining products or platforms: ou likely will have to invent a unit of value. For instance, say you are building a user research repository platform to take advantage of the ResearchOps movement that is slowly building momentum. The platform stores user interviews based on studies, the typical unit for user research platforms. You might be tempted to use studies or users as a unit of value. That would be a mistake. That unit of value is from user research and does not apply. You are building a platform to store, search and share user research not conduct it. In this case, a better unit of value is a story.
You could chunk-up and create a storybook per persona, the equivalent of an Airtable base or decide on pricing or simply decide to attach value parameters to one story. Because user research requires that there be a distinct pattern in the feedback per persona, my view is attaching value parameters to a storybook is a better approach, with a limit on the number of stories you can create. Stories can be words or rich media giving clue to what might be utility and excitement levels. Stores can also be circulated widely in companies, giving you a second value parameter: the number of people accessing the story as basis for computing the final price.
Setting the price :
Price is perception, so in the end, you will set a price point that you feel your customer is likely to pay. No easy formula here, but there is a strategy you can borrow from retail sales. When entering a new market where the price ceiling is unknown, Mark & Spencers started with a high price ( specifically in Bangalore India where I saw this). This initial price ceiling was high enough to turn customers away. Slowly they lowered the ceiling until they started seeing footfall. In the process, they discovered how much of a premium customers were willing to pay for a product that clearly had better quality and style than other offerings on the market. A high price is beneficial on the brand perception of course, but mostly it avoids being trapped in too low a price point. Customer are delighted when you offer discounts on a pricey product, never when you raise them.
All the best!
Thanks to: Sofia Quintero and Lukasz Korecki for the conversation on value units